Crude oil capped its biggest weekly gain in two years on concern the turmoil that has cut Libya’s output may spread to other parts of the Middle East.

Futures in New York surged to a 29-month high yesterday amid estimates that Libya’s output was cut by as much as two- thirds. Oil retreated below $100 after Saudi Arabia, the U.S. and the International Energy Agency said they can compensate for any Libyan supply disruption and as the U.S. economy grew less than forecast in the fourth quarter.

“We may move a lot higher on concern over how the Libyan situation will develop over the weekend,” said Phil Flynn, vice president of research at PFGBest in Chicago. “The reassurances from Saudi Arabia, the IEA and even the White House helped calm fears yesterday, but might not be enough.”

Crude oil for April delivery climbed 60 cents, or 0.6 percent, to settle at $97.88 a barrel on the New York Mercantile Exchange. Oil rose to $103.41 yesterday, the highest intraday price since Sept. 29, 2008. Futures are up 25 percent from a year ago.

Prices for futures closest to expiration increased 14 percent this week in New York, the biggest gain since the five days ended Feb. 27, 2009. April crude oil became the front-month contract on Feb. 23.

Brent crude oil for April settlement rose 62 cents, or 0.6 percent, to $111.98 a barrel on the London-based ICE Futures Europe exchange. Yesterday, it climbed to $119.79, the highest price since Aug. 22, 2008. Brent is up 9.2 percent this week.

Libyan Output

Libyan production has been cut by more than 1 million barrels a day, according to Barclays Capital. The IEA said output was down by at least 850,000 barrels. Libya, which pumps 1.6 million barrels of oil a day, is the ninth-largest producer among the 12 members of OPEC, shipping most of its crude and fuels across the Mediterranean to Europe.

Most Libyan oil grades are classified as light and sweet, meaning they are less dense and low in sulfur, according to the U.S. Energy Department. Light-sweet oil is easier to refine into gasoline and distillate fuels such as diesel. The country has the largest crude-oil reserves in Africa.

“Libya produces very high quality crude,” said Rick Mueller, director of oil markets at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Any extra barrels from the Saudis and Kuwaitis won’t be a good quality match, so the replacement of Libyan oil won’t be seamless. Until there’s a resolution there will be a hefty geopolitical premium.”

Qaddafi’s Defense

Muammar Qaddafi bolstered defenses in Tripoli, Libya’s capital, after rebels seized much of the rest of the country, as the United Nations prepared to debate sanctions and the U.K. said the route to the city’s airport is no longer safe.

“We will fight and defeat” any foreign intervention, Qaddafi told crowds gathered in Tripoli’s Green Square who carried posters and banners supporting him. “We prepared to defend Libya. Be prepared to defend the oil.”

The Paris-based IEA said it is ready to release emergency stockpiles, if needed. Saudi Arabia and other members of the Organization of Petroleum Exporting Countries said they won’t wait for an emergency meeting of the group to increase output, according to a person with knowledge of producer-nation policy.

OPEC is prepared to meet any shortage if needed, Saudi Arabian Oil Minister Ali al-Naimi said Feb. 22. The country pumped 8.4 million barrels a day last in January, according to Bloomberg News estimates.

Saudi Arabia has increased crude oil production this month in response to the likely disruptions to exports from Libya, the IEA said.

Saudi Arabian Output

“We are aware of increased volumes from Saudi Arabia but don’t know the exact amount,” Diane Munro, the IEA’s supply analyst, said in a telephone interview from Paris today.

The production cuts in Libya were the first instance of crude supplies being reduced by the civil unrest spreading through the Middle East and North Africa. Protests ignited by the ouster of Tunisia’s president last month and fanned by the Feb. 11 fall of Egyptian President Hosni Mubarak have also spread to Yemen and Bahrain.

“We could soon be looking at full-out civil war,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “There’s no obvious end in sight and it doesn’t look like it will end pretty.”

While OPEC spare capacity is sufficient to make up for any shortfall from Libya, there is a “significant upside risk” to prices if the unrest reduces supplies from other oil-producing countries, Goldman Sachs Group Inc. said in a Feb. 23 report.

Nomura Holdings Inc. predicted on the same day that oil prices may surge to $220 on the Libyan outages and any expansion into neighboring Algeria.

Oil volume on the Nymex was 584,200 contracts as of 2:38 p.m. in electronic trading in New York. Volume totaled 1.17 million contracts yesterday, 51 percent above the average of the past three months. Open interest was 1.52 million contracts.